The Effects of Repealing Prevailing Wage Laws

"Repeal leads to a decline of approximately 10 percentage points in the long-run
union wage premium earned by construction workers ... but does not appear to lower
the wages of black construction workers."

Most states have "prevailing wage laws" which require private contractors
bidding for state or local public works projects, or private projects that are financed in
part by public funds, to pay a minimum package of wages and benefits to their workers.
Although details of the laws differ from state to state, the effects of these laws on
construction labor costs, and on construction labor markets more generally, have been
the focus of an extensive policy debate.

In Prevailing Wage Laws and Construction Labor Markets
(NBER Working Paper No. 7454), NBER Research Associates Daniel Kessler and Lawrence Katz examine the consequences of several states' repeal in the 1970s and 1980s of their prevailing wage laws. By comparing trends in construction labor markets in "repeal" states to trends in labor markets in states that did not change their laws, they find that the average wages of construction workers (in repeal states) decline slightly after repeal -- by about 2 to 4 percent.

However, they also find that the small overall impact of law repeal masks
substantial differences in outcomes for different groups of construction workers. The
negative effects of repeal on wages are borne primarily by unionized and by white
workers. First, repeal leads to a decline of approximately 10 percentage points in the
long-run union wage premium earned by construction workers, or almost half of the total
union wage premium in construction. Since union members account for approximately
25 percent of all construction workers, the 10-percentage-point decrease in the union
wage premium explains almost all of the (approximately 2 to 4 percent) decline in
construction workers' wages.

Second, despite the negative overall effects of repeal on the wages of
construction workers, the repeal of prevailing wage laws does not appear to lower the
wages of black construction workers. According to the authors' estimates from census
data, prevailing wage law repeal actually raises the construction industry wage premium
for black workers by approximately 4 percentage points relative to other workers.

The implications of these findings, and their applicability to other states
considering repeal of their prevailing wage laws, depend crucially on the mechanism
causing the differential impact of repeal across groups. The differential impact of repeal
by race and union status may reflect a decrease in discrimination caused by a weakening
of construction unions, or a change in union behavior arising out of a declining union
wage premium. On the other hand, if repeal affects workers in heavy construction (for
example, road and sewer construction) more than workers in light construction, and if
heavy construction workers are more likely to be white and unionized, then the
differential impact of repeal by race and union status may simply reflect the differential
composition of workers in the two segments of the construction industry.

Unfortunately, as Kessler and Katz point out, they cannot distinguish definitively
between these two possibilities based on the information collected by either the census
or the Current Population Survey. They conclude their analysis with some possible ways
that future research might investigate the mechanism through which prevailing wage
laws affect wage schedules.

-- David R. Francis

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